There is an important conceptual distinction between a demerit
good and a negative externality. A negative externality occurs when
the consumption of a good has measurable negative consequences on
others who do not consume the good themselves. Pollution (due, for
example, to automobile use) is the canonical example of a negative
externality. Another example is cigarettes. It not only affects
you, but the people around you (second hand smoking). By contrast,
a demerit good is viewed as undesirable because its consumption has
negative effects upon the consumer
him/herself.

Two fundamental views in welfare economics, welfarism and
paternalism, differ in their conceptual treatment of 'demerit
goods'. Simply, welfarism takes the individual's *own* perception
of the utility of a good as the final judgement of the utility of
the good for that person, and thereby disallows the concept of a
'demerit good' (while allowing the analysis of negative
externalities). As an extreme example, if a heroin addict purchases
heroin, they must have done so because heroin makes them better
off, and this transaction is viewed as a net social positive
(assuming that the addict does not commit any other crimes as the
result of their addiction). Paternalism, on the other hand, judges
that heroin "isn't good for you", and feels free to override the
judgement of the addicts themselves (see 'Welfare Economics,
Boadway and Bruce, Basil Blackwell 1984)